Must know: What decreasing home sales mean for fixed income markets

Existing home sales are a monthly release, issued by the National Association of Realtors (or NAR). Total existing home sales represent completed transactions that include single-family homes, townhomes, condominiums, and co-ops. Existing home sales for the month of January were released on Thursday, February 21. The seasonally adjusted annual rate (or SAAR) for existing home sales came in at 4.62 million versus a consensus estimate that ranged between 4.48 million and 4.85 million units. January’s reading was the lowest since July 2012, when the SAAR for home sales came in at 4.59 million.

January’s reading was down 5.1% month-on-month compared to December 2013 (4.87 million units) and down 6.5% compared to January 2013, which came in at 4.94 million. The decrease was attributable to poor weather, rising residential prices, higher flood insurance, and lower inventory.

Inflationary trends emerge in housing sector

Normally, a decrease in existing home sales would imply, other factors remaining constant, that the economy is not recovering as expected. But February’s reading seems more affected by factors unique to the housing sector and in part has been impacted by the weather. Tight inventory and rising price environment are factors which are likely to increase housing supply in the future as companies such as Lennar (LEN), Toll Brothers (TOL), D.R. Horton (DHI), and PulteGroup (PHM) respond to the demand and housing starts increase. This in turn would further raise the construction costs, which are already up significantly.

Cost-push inflation and demand-pull inflation in the housing space are likely to lead to further future increases in interest rates. Rising demand for housing would also imply improving consumer confidence in the overall economy. An improving economy, would mean (other factors remaining constant) that the Fed will continue to implement the tapering program, which in turn would imply lesser liquidity in the financial markets, causing interest rates to rise and bond prices to fall.